Saving for college? Benefit from little-noticed Section 529 changes

If you use (or plan to use) Section 529 college savings plans, take note: A few small changes buried in a new law could help you save even more in those tax-advantaged college-savings vehicles.

The Deficit Reduction Act says that transfers to certain Section 529 plans won’t have the same adverse impact on financial-aid determinations. In the past, parents may have shied away from Section 529 plans for financial-aid reasons.

Here’s the skinny on the key changes:

Transfers to Section 529 plans. The new law clarifies that amounts transferred to a Section 529 plan from a child’s custodial account won’t be treated as assets owned by the student for federal financial- aid calculations.

Under the complex expected-contribution formula used to dole out need-based financial aid, student assets generally count more against the family than parental assets.

Prepaid tuition plans. Section 529 plans come in two varieties: College Savings Plans and Prepaid Tuition Plans. Currently, only 13 states offer Prepaid Tuition Plans, while all 50 states and the District of Columbia offer College Savings Plans. (Prepaid Tuition Plans are often limited to in-state residents.)

Previously, dollars in Prepaid Tuition Plans were treated as student assets, but funds in a College Savings Plan were considered the parents’ assets. That gave College Savings Plans a critical edge under the federal financial-aid guidelines.

But the new law evens things out. Assets in both types of Section 529 plans will now be treated as parental assets. That change could spur greater interest in the Prepaid Tuition Plan variety.